Introduction to Financial Markets
Final Exam
Course Introduction
Introduction to Financial Markets provides a comprehensive overview of the structure, function, and importance of financial markets in the global economy. The course explores the roles played by various participants, including individual investors, banks, corporations, and governments, as well as the key financial instruments such as stocks, bonds, and derivatives. Topics include the basics of market operations, pricing mechanisms, risk and return, regulatory environments, and recent developments in financial technology. By the end of the course, students will have a solid understanding of how financial markets channel funds, facilitate investment and economic growth, and respond to external events and policies.
Recommended Textbook
Financial Markets and Institutions 11th Edition by Jeff Madura
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Page 2
Chapter 1: Role of Financial Markets and Institutions
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Q1) A five-year security was purchased two years ago by an investor who plans to resell it. The security will be sold by the investor in the so-called A)secondary market.
B)primary market.
C)deficit market.
D)surplus market.
Answer: A
Q2) Which of the following financial intermediaries commonly invests in stocks and bonds?
A)pension funds
B)insurance companies
C)mutual funds
D)all of the above
Answer: D
Q3) If markets are perfect, securities buyers and sellers to not have full access to information and cannot always break down securities to the precise size they desire.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Determination of Interest Rates
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Q1) If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be a ____ of loanable funds.
A)increase; surplus
B)increase; shortage
C)decrease; surplus
D)decrease; shortage
Answer: B
Q2) At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.
A)greater; higher
B)greater; lower
C)smaller; lower
D)none of the above
Answer: B
Q3) According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low.
A)True
B)False
Answer: False
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Chapter 3: Structure of Interest Rates
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Sample Questions
Q1) If shorter term securities have higher annualized yields than longer term securities, the yield curve
A)is horizontal.
B)is upward sloping.
C)is downward sloping.
D)cannot be determined unless we know additional information (such as the level of market interest rates).
Answer: C
Q2) The term structure of interest rates defines the relationship between maturity and annualized yield, holding other factors such as risk constant.
A)True
B)False
Answer: True
Q3) Bonds issued at different times by the same corporation may not receive the same rating from a rating agency.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Functions of the Fed
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Q1) The Monetary Control Act of 1980 subjected
A)only member banks to the reserve requirements set by the Fed.
B)only S&Ls to the reserve requirements set by the Fed.
C)all depository institutions to the reserve requirements set by the Fed.
D)only national banks to reserve requirements set by the Fed.
Q2) The purpose of the Trading Desk of the Federal Reserve Bank of New York is to buy stocks for member commercial banks.
A)True
B)False
Q3) The primary credit lending rate changes in accordance with changes in the federal funds rate.
A)True
B)False
Q4) ____ open market operations offset the impact of other conditions that affect the level of funds.
A)Active
B)Passive
C)Dynamic
D)Defensive
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Chapter 5: Monetary Policy
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Q1) If the federal government is willing to pay whatever is necessary to borrow loanable funds, but the private sector is not, this reflects
A)the crowding-out effect.
B)dynamic open market operations.
C)defensive open market operations.
D)monetizing the debt.
Q2) According to the theory of rational expectations, if the Fed uses open market operations in order to increase the supply of loanable funds, the ultimate effect on interest rates is definitely
A)a reduction in interest rates.
B)an increase in interest rates.
C)no effect on the interest rates.
D)the impact on interest rates cannot be determined.
Q3) In 2012, the Fed stated that it would continue to purchase Treasury bonds in the financial markets until GDP growth increased to a target level.
A)True
B)False
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Chapter 6: Money Markets
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Sample Questions
Q1) Which of the following securities is most likely to be used in a repo transaction?
A)commercial paper
B)certificate of deposit
C)Treasury bill
D)common stock
E)All of the above are equally likely to be used in a repo transaction.
Q2) The effective yield of a foreign money market security is ____ when the foreign currency strengthens against the dollar.
A)increased
B)reduced
C)always negative
D)unaffected
Q3) Junk commercial paper is commercial paper that is not rated or rated low.
A)True
B)False
Q4) T-bills do not offer coupon payments but are sold at a discount from par value.
A)True
B)False
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Page 8
Chapter 7: Bond Markets
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Sample Questions
Q1) The coupon rate of most variable-rate bonds is tied to
A)the prime rate.
B)the discount rate.
C)LIBOR.
D)the federal funds rate.
Q2) When purchasing bonds, individual investors can use a ________ to specify the maximum price they are willing to pay for a bond.
A)limit order
B)market order
C)stop order
D)price order
Q3) A ____ has first claim on specified assets, while a ____ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures.
A)first mortgage bond; second mortgage bond
B)first mortgage bond; debenture
C)first mortgage bond; subordinated debenture
D)chattel mortgage bond; subordinated debenture
E)none of the above
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Page 9
Chapter 8: Bond Valuation and Risk
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Q1) An increase in either the risk-free rate or the general level of the risk premium on bonds results in a higher required rate of return and therefore causes bond prices to increase.
A)True
B)False
Q2) The value of ____-risk securities will be relatively ____.
A)high; high
B)high; low
C)low; low
D)none of the above
Q3) Assume that the value of liabilities equals that of earning assets. If asset portfolio durations are ____ than liability portfolio durations, then the market value of assets are ____ interest-rate sensitive than the market value of liabilities.
A)greater; more
B)greater; equally
C)greater; less
D)less; equally
E)B and D
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Chapter 9: Mortgage Markets
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Q1) The interest rate on a second mortgage is ____ on a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the event of default.
A)higher than; behind B)equal to that; equal to C)lower than; ahead of D)higher than; ahead of E)lower than; behind
Q2) The adjustable-rate mortgage creates uncertainty for the ____ profit margin, but reduces the uncertainty for the ____.
A)originator's; borrower
B)borrower's; originator
C)government's; originator
D)none of the above
Q3) Mortgage prices are subject to
A)interest rate risk.
B)credit risk.
C)prepayment risk.
D)all of the above.
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Chapter 10: Stock Offerings and Investor Monitoring
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Q1) Which of the following is not a form of shareholder activism?
A)investors communicating their concerns to other investors in an effort to place more pressure on the firm's managers or its board members
B)poison pills
C)shareholder lawsuits
D)all of the above
Q2) When a corporation makes a secondary offering, it may direct sales of the stock to its existing shareholders by giving them:
A)preemptive rights.
B)limit orders.
C)subscription rights.
D)presumptive rights.
Q3) ____ are acquisitions that require substantial amounts of borrowed funds.
A)Stock repurchases
B)Corporate controls
C)Leveraged buyouts
D)Stock splits
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Chapter 11: Stock Valuation and Risk
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Q1) The standard deviation of a stock's returns is used to measure a stock's A)volatility.
B)beta.
C)Treynor Index.
D)risk-free rate.
Q2) The price-earnings valuation method applies the ____ price-earnings ratio to ____ earnings per share in order to value the firm's stock.
A)firm's; industry
B)firm's; firm's
C)average industry; industry
D)average industry; firm's
Q3) Value at risk estimates the ____ a particular investment for a specified confidence level.
A)beta of
B)risk-free rate of
C)largest expected loss to D)standard deviation of
Q4) Stock price volatility increased during the credit crisis.
A)True
B)False
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Chapter 12: Market Microstructure and Strategies
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Sample Questions
Q1) Trading halts are intended to ensure that the market has complete information before trading on news.
A)True
B)False
Q2) The transaction costs associated with international trading of stocks have been reduced by
A)the consolidation of stock exchanges.
B)extensive computerization.
C)the Eurolist system.
D)all of the above
Q3) When the price of a company's stock increases or decreases significantly in advance of a public announcement of an event affecting the company, there are suspicions that __________ may have occurred.
A)bid rigging
B)default inversion
C)insider trading
D)an increase in margin requirements
Q4) Trading halts are intended to prevent insider trading.
A)True
B)False
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Chapter 13: Financial Futures Markets
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Q1) Since stock index futures prices are primarily driven by movements in the corresponding stock indexes, participants in stock index futures monitor indicators that may signal changes in the stock indexes.
A)True
B)False
Q2) An unexpected ____ in the consumer price index tends to create expectations of ____ interest rates and places ____ pressure on Treasury bond futures prices. A)increase; higher; downward B)increase; lower; downward C)increase; higher; upward D)decrease; higher; downward E)none of the above
Q3) Dynamic asset allocation involves the switching between risky and low-risk investments by institutional investors over time in response to changing expectations. A)True
B)False
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Chapter 14: Options Markets
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Sample Questions
Q1) A speculator purchased a call option with an exercise price of $31 for a premium of $4. The option was exercised a few days later when the stock price was $34. What was the return to the speculator?
A)25 percent
B)-25 percent
C)-3.2 percent
D)-2.9 percent
Q2) Vince, a speculator, expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 95-32. The premium paid for the put option is 2-36. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 93-22. Vince exercises the option and closes out the position by purchasing an identical futures contract. Vince's net gain from this speculative strategy is $____.
A)-406.25
B)4,718.75
C)-4,718.75
D)-812.50
E)none of the above
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Page 16
Chapter 15: Swap Markets
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Sample Questions
Q1) Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate-sensitive ____ than ____ and therefore were adversely affected by ____ interest rates.
A)assets; liabilities; increasing B)liabilities; assets; decreasing C)liabilities; assets; increasing D)none of the above
Q2) In a ____, a buyer makes periodic payments to a seller in exchange for protection against the possible default of debt securities specified in the contract.
A)default option contract
B)default futures contract
C)bankruptcy contract
D)credit default swap
Q3) An interest rate collar involves the purchase of an interest rate cap and the simultaneously sale of an interest rate floor.
A)True
B)False
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Chapter 16: Foreign Exchange Derivative Markets
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Q1) ____ forecasting involves the use of historical exchange rate data to predict future values.
A)Technical
B)Fundamental
C)Market-based
D)Mixed
Q2) The primary advantage of currency options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a particular currency at a specified price within a given period.
A)True
B)False
Q3) Which of the following statements is incorrect?
A)Central banks often consider adjusting a currency's value to influence economic conditions.
B)If the U.S. central bank wishes to stimulate the economy, it could weaken the dollar.
C)A weaker dollar could cause U.S. inflation by reducing foreign competition.
D)Direct intervention occurs when the central bank influences the factors that determine the dollar's value.
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18
Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) A ____ loan may be especially appropriate when the bank wishes to avoid adding more debt to its balance sheet.
A)term
B)bullet
C)direct lease
D)revolving credit
Q2) When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a
A)federal funds loan.
B)discount window loan.
C)repurchase agreement.
D)commercial paper transaction.
Q3) The primary credit lending rate is determined by
A)the Federal Reserve.
B)Congress.
C)the Treasury.
D)the President of the United States.
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Chapter 18: Bank Regulation
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Q1) In general, banks would prefer to maintain a high amount of capital to boost their return on equity ratio, yet regulators have argued that banks need only a sufficient amount of capital to absorb potential operating losses.
A)True
B)False
Q2) Commercial banks are allowed to invest in junk bonds.
A)True
B)False
Q3) The Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010:
A)ended the system of risk-based insurance premiums.
B)set requirements for the Deposit Insurance Fund's reserves.
C)raised the limit for insured deposits to $750,000 per depositor.
D)allowed large insurance companies such as American International Group to compete with the FDIC to insure bank deposits.
Q4) Deposit insurance now covers all bank deposits without imposing any limit. A)True
B)False
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Chapter 19: Bank Management
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Q1) Which of the following is a measure for banks to assess their exposure to interest rate risk?
A)capital ratio
B)leverage measure
C)duration measurement
D)gap ratio
E)C and D
Q2) For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive.
A)True
B)False
Q3) In an interest rate swap, a bank whose liabilities are ____ rate sensitive than its assets can swap payments with a ____ interest rate in exchange for payments with a ____ interest rate.
A)more; fixed; variable
B)more; variable; fixed
C)less; fixed; variable
D)less; fixed; fixed
E)none of the above
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Page 21
Chapter 20: Bank Performance
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Q1) Net income measured as a percentage of assets is
A)return on equity (ROE).
B)return on liabilities (ROL).
C)return on investment (ROI).
D)return on assets (ROA).
Q2) Any individual bank's ROA depends on the bank's policy decisions, but not on uncontrollable factors relating to the economy and government regulations.
A)True
B)False
Q3) The loan loss provision as a percentage of assets should increase during periods of high economic growth.
A)True
B)False
Q4) A bank's ROA ____ account for loan losses. A bank's ROE ____ account for loan losses.
A)does; does
B)does; does not
C)does not; does not
D)does not; does
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Chapter 21: Thrift Operations
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Sample Questions
Q1) Today, credit unions are regulated as to the A)types of services they can offer.
B)rates they offer on deposits.
C)maturity of residential loans they make.
D)size of residential mortgage loans.
Q2) Because credit unions' sources and uses of funds are generally interest rate ____, movements in interest revenues and interest expenses of credit unions are ____.
A)sensitive; negatively correlated
B)insensitive; highly correlated
C)sensitive; uncorrelated
D)sensitive; highly correlated
E)insensitive; uncorrelated
Q3) Credit unions are unregulated as to the types of services they offer.
A)True
B)False
Q4) The capital of savings institutions is primarily composed of retained earnings and funds obtained from issuing stock.
A)True
B)False
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Chapter 22: Finance Company Operations
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Q1) Finance companies are more likely to issue bonds when their assets are presently ____ interest-rate sensitive than their liabilities, and when interest rates are expected to ____.
A)more; decrease
B)less; increase
C)more; increase
D)less; decrease
Q2) A wholly owned subsidiary whose primary purpose is to finance sales of the parent company's products and services, provide wholesale financing to distributors of the parent company's products, and purchase receivables of the parent company is a A)captive finance subsidiary.
B)factor.
C)leasing agent.
D)captive factoring agent.
Q3) Finance companies are not subject to state regulations on intrastate business. A)True
B)False
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Chapter 23: Mutual Fund Operations
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Q1) Which of the following is not true with respect to venture capital funds?
A)They typically invest in young, growing firms that need equity funding but are not ready or willing to go public.
B)More than half of all VC investing is in businesses that are being created.
C)Venture capital funds tend to focus on technology firms, which have the potential for high returns but also exhibit a high level of risk.
D)Because VC funds invest in fairly safe ventures, a low percentage of their ventures fail.
E)All of the above are correct with respect to venture capital funds.
Q2) Hedge funds differ from open-end mutual funds in the sense that
A)they require a much smaller initial investment.
B)they are open to additional investments at any time.
C)their investors cannot sell shares back to the fund at any time they desire.
D)they invest in very limited set of securities.
Q3) Many businesses that go public are partially backed by venture capital before the IPO.
A)True
B)False
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Chapter 24: Securities Operations
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Q1) Securities firms commonly perform all of the following functions except for _____ when facilitating a secondary stock offering.
A)origination
B)underwriting stock
C)distribution of stock
D)its own purchase of at least 20 percent of the offering
Q2) Securities firms serve as an intermediary for each of the following, except A)stock offerings.
B)debt offerings.
C)IPOs.
D)they serve as intermediary for all of the above.
Q3) Securities and Exchange Commission (SEC) approval of a registration statement guarantees the quality and safety of the securities to be issued.
A)True
B)False
Q4) The compensation paid to securities firms for raising funds is typically in the form of interest income.
A)True B)False
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Chapter 25: Insurance and Pension Fund Operations
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Q1) Which of the following is not a common use of funds by life insurance companies?
A)government securities
B)corporate bonds
C)stocks
D)commercial paper
Q2) ____ insurance protects the policyholders until death or as long as premiums are promptly paid.
A)Whole life
B)Variable life
C)Term life
D)Annuity life
E)None of the above
Q3) The insurance premium is ____ related to the uncertainty about the size of the payments; the premium is also ____ for group plans.
A)higher; lower
B)higher; higher
C)lower; higher
D)lower; lower
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